What Is the Economic Cycle? Definition and Example
The four phases of the economic cycle, how each tends to affect stocks and sectors, and how to judge where the economy is without guessing.
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What Is the Yield Curve? Definition and Example
The yield curve shows what the US government pays to borrow for different lengths of time. Here is why its shape matters, and what inversions have and have not predicted.
Key takeaways
- The yield curve plots Treasury yields from short maturities (months) to long ones (10–30 years). Normally long yields are higher; when short yields rise above them, the curve is “inverted”.
- The 10‑year minus 2‑year spread inverted before each US recession from 1980 to 2008.
- Its longest inversion in the data since 1976, July 2022 to September 2024, had not been followed by an NBER‑dated recession as of October 2026.
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What is the yield curve?
It is a line joining the yields on Treasury bonds of different maturities on the same day. Investors usually demand more to lend for longer, so the line normally slopes up. The most quoted measure is the 10‑year yield minus the 2‑year yield, published by the Federal Reserve as FRED series T10Y2Y.
What does an inverted yield curve mean?
An inversion means short‑term rates are above long‑term rates. That usually happens when the Fed funds rate is high and markets expect rates, growth or inflation to fall later. Banks borrow short and lend long, so an inverted curve can also squeeze lending.
Worked example: inversions and recessions
Exent’s calculation from FRED data, with recession start dates from the NBER:
| 10y − 2y inverted | Next recession began (NBER peak) |
|---|---|
| Aug 1978 – May 1980 | January 1980 |
| Sep 1980 – Nov 1981 | July 1981 |
| Dec 1988 – Nov 1989 (with a break) | July 1990 |
| Feb 2000 – Dec 2000 | March 2001 |
| Jan 2006 – Jun 2007 (on and off) | December 2007 |
| Jul 2022 – Sep 2024 | None dated as of October 2026 |
On Oct 9, 2026 the spread was +0.44 percentage points, a normal upward slope. Recession dates: NBER business cycle table.
Why it matters for a self‑directed investor
The curve shapes bank profits, mortgage rates and how bonds in your portfolio react to rate changes. It is one of several recession indicators, best read alongside the economic cycle and Treasury yields.
Common mistakes
- Treating an inversion as a timing signal. Lead times have ranged from months to well over a year.
- Assuming it always works. The 2022–2024 inversion is the clearest counterexample so far.
- Selling stocks on inversion alone. SPY returned 26.2% in 2023 and 24.9% in 2024 while the curve was inverted (Exent’s data).
Frequently asked questions
It signals that markets expect rates to fall, usually because growth is expected to weaken, and it can make bank lending less profitable. It is a warning sign, not a certainty.
Not as of Oct 9, 2026, when the 10-year minus 2-year spread was +0.44 percentage points according to FRED.
They use different short-term rates. The 10-year minus 3-month spread tracks Fed policy more directly; both are widely watched.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.